Two of Australia’s most highly regarded investors have defended equities as the asset class of choice against fixed interest, arguing that bonds are overvalued and risky.

Peter Morgan, best known for his time as a star fund manager at
Perpetual
, and
Kerr Neilson
, the billionaire co-founder of
Platinum Asset Management
, told the annual Morningstar Investment Conference in Sydney yesterday that equities deserved majority weightings in Australian portfolios.

“I was there between 2005 and 2008 when [markets] blew up and no one was saying then we had too much in equities. It’s only now after it’s corrected," Mr Morgan said.

“It’s my personal view that it’s the biggest bubble we’ve ever seen in fixed interest. Conceptually there’s not an easy answer to it, but I don’t live by percentages."

Mr Neilson warned about the dangers of viewing government bonds as an asset class as “risk-free".

“I wouldn’t want to lend the government money if I were a sane person," Mr Neilson said.

“In this type of environment bonds can do quite well. [But] if you’d lent the Greek government money in the last little while, you are talking about having lost 70 per cent of your capital. That’s the world we’re in. I don’t think bonds are risk-free. It’s not by accident the credit ratings agencies are downgrading government bonds from AAA to something less."

Mr Morgan, well known for his aversion to investing in resource stocks, lamented the lack of world-leading companies available to investors on the Australian sharemarket.

Related Quotes

Company Profile

“There don’t seem to be a number of good Australian companies out there that are competitive on the world stage.
Westfield
and perhaps
CSL
are the exceptions," Mr Morgan said.

“Perhaps it is a little bit disappointing we don’t have a great Australian company. If you look at Apple, Facebook and Google, they’re all founded by drop-outs, so it’s not like it’s a limitation of our education system.

“
BHP
is a good cyclical company but it’s driven by commodities. It’s not genius stuff. And we’re going through the biggest commodity boom of all time with not a lot to show for it."

Mr Neilson, famed for delivering years of strong performance for his funds and demanding high fees as a result, was asked to defend the recent performance of his flagship international fund.

The fund suffered its worst year on record in 2011 and was down 12 per cent. Previously the fund had earned 11.6 per cent a year since its launch in 1995.

“We made a muck-up last year for a whole lot of reasons," Mr Neilson said.

“It was crappy. When we’re in this environment of printing money, it’s very disorienting. Our style is to look for stocks that have been neglected. Where you have to be careful is value traps. I was paying too much for that sort of company in the past year."

Mr Neilson said he was committed to his investment in Microsoft and had just picked up a stake in Google. Technology companies are overweight in his portfolio.

Mr Morgan, now a self-described professional investor after the demise in 2010 of his boutique investment firm, 452 Capital, gave his views on the recent spate of shareholder activism, which this week caused the Spotless board to buckle and accept a takeover offer from a private equity firm.

“Shareholders have always had the right if they wanted to use it," he said. “At the end of the day it’s pretty simple – you’re paid to perform and how you perform is up to you. If you’re driving a result just to get performance, and that’s what’s happened effectively with Spotless. Personally I don’t see anything wrong with that. It’s incumbent on the board to get across that the company is fundamentally undervalued.

“When I started at Perpetual the word corporate governance didn’t exist. I think corporates in Australia are a lot more responsible than they ever were to the shareholders. It seems hypocritical to me that fund managers aren’t under the same corporate governance guidelines."

Mr Morgan said he had no plans to return to funds management and he disliked the pressure of quarterly performance reports and benchmark investing.

“I’m very active. I hate benchmarks. In a small market like Australia, they’re size and liquidity-driven without any investment fundamentals behind them.

“I can remember in the early ’90s all the banks were almost broke and in 1998 to 2000 all the cyclical resource companies were on their knees, and today the two biggest sectors are commodities and banks."